The Battle of 2016


WASHINGTON, D.C.—Generational warfare broke out last Wednesday morning on a scorching plaza in front of a posh Washington, D.C., hotel. As his buddies stood by him smiling in support, a young man in khakis and shades told a white-haired older woman, “You obviously don’t understand the capital markets.”

“How much you want to bet you’ll feel the same way six months from now, when the market really tanks?” she shot back.

“It’s a bet!” came the reply, but neither extended a hand to shake.

Nor was their conversation really about the stock market. It was taking place outside the Loews L’Enfant Plaza Hotel, where George W. Bush’s President’s Commission on Strengthening Social Security was about to open its third meeting.

Official estimates say the system’s trust funds will start to pay out more money than they take in by 2016, and by 2038 they will run out of funds to pay Social Security’s millions of beneficiaries. Bush’s commission is charged with developing a solution to this problem. Its 16 handpicked members are pledged to include in their recommendations a Bush campaign promise allowing workers to take some of the payroll taxes they normally contribute to Social Security, and instead invest them in the stock market through personal retirement accounts (PRAs). The young man and his eight or so buddies outside on the plaza were recruited—and equipped with matching T-shirts—by Citizens for a Sound Economy, a conservative advocacy group, to put on a mini-demo in support of PRAs.

Rushing out to meet them were the older woman and about 25 other Social Security supporters, who were carrying signs that read “Phony crisis, phony commission.”

If they’re right, in 2038 the Social Security trust fund will only pull in enough payroll taxes to cover 73 percent of its present level of expenditures.

This clash, although fairly typical for Washington, had extra urgency, because the Bush commission has gotten off to a stumbling start. Even some mainstream media blasted its interim report for exaggerating the Social Security system’s problems. Senior Democrats including Representatives Charlie Rangel and Bob Matsui denounced the Bush commission—whose chief of staff and one of its members are from the pro-PRA Cato Institute—as a “sham.” They called on Bush to scrap the commission and negotiate directly with Congress if he wants to “reform” Social Security.

White House policy adviser Karl Rove is reportedly calling for a full court press to rescue the commission, including news conferences, poll releases, instant demos, and a sharper message from conservative supporters of PRAs. In response, The AFL-CIO and its allies are gearing up their own offensive. The commission’s public hearing in San Diego on September 6 will set in motion a conflict that’s likely to continue well past the release of the commission’s final recommendations this fall.

Once a fringe idea kept alive mainly by the Cato Institute, a libertarian think tank, PRAs are now endorsed by the president, the entire Republican congressional leadership and some conservative Democrats. Younger workers would be better off with PRAs, the argument goes, because they could earn higher returns than the Social Security system now provides.

Defenders of the current system contend that such a plan would undermine Social Security financially by siphoning off payroll taxes that are needed to pay current beneficiaries. All that the government would accomplish by allowing workers to carve PRAs out of their payroll taxes would be to enrich Wall Street, which has been clamoring for years for a piece of the $500 billion-plus of payroll taxes that flow annually into the system.

But PRAs have as much to do with ideology as with profit. The mammoth Social Security system, America’s biggest benefits program, pays out guaranteed old-age, disability, and survivors’ benefits to some 45 million Americans a year, pumping over $450 billion annually into the economy. To politicians and policy wonks both liberal and conservative, the immensely popular 65-year-old program remains the crown jewel of FDR’s New Deal legacy and the best argument that a benefits program based on collective social obligation can work in this country.

Partially privatizing Social Security by turning over some payroll taxes to private money managers would transform the system from a benefits program to a wealth-creating vehicle like a 401(k) plan. Supporters like former senator Daniel Patrick Moynihan, who co-chairs the Bush commission, say this would help working-class Americans share in the wealth that Wall Street creates. Critics say it would invite unsophisticated, less-affluent workers to gamble away their benefits and put them at risk of living in poverty after they retire.

PRAs wouldn’t have emerged as a politically viable proposal if it hadn’t been for a series of estimates by the Social Security system’s trustees predicting that the upcoming retirement of the 60 million to 70 million-strong Baby Boom generation will put the system in a demographic squeeze. By 2016, the trustees’ estimates say, the system’s funds will start to pay out more money than they take in; by 2038 the trust funds will be exhausted. These are only estimates, of course. But if they’re right, in 2038 the Social Security trust fund will only pull in enough payroll taxes to cover 73 percent of its present level of expenditures. Unless Congress approved a tax increase or covered the shortfall with other revenues, retirees, widows, and survivors under 18 would have to swallow benefits cuts and possibly do without inflation adjustments. Many could be forced into poverty, reversing Social Security’s greatest achievement—the drastic reduction of old-age poverty in America.

Privatizers insist that only drastic change can prevent “generational warfare” over Social Security. Once the Baby Boomers start to retire, they argue, retiree benefits payments will place an intolerable burden on current workers. Workers need PRAs so that they can make up for the inevitable benefits cuts with higher returns from the stock market.

Social Security’s traditional champions—progressive Democrats, unions, activists for seniors—say the system’s demographic crisis, if it ever comes, can be corrected with some simple adjustments. For instance, Congress could increase payroll taxes slightly, or raise the payroll tax threshold so wealthy earners would have to contribute more to support the system. Creating PRAs would only aggravate the problem by siphoning off payroll taxes that Social Security will need to pay current retirees. In fact, a report by the liberal Center for Budget and Policy Priorities estimates that if a substantial portion of workers decided to put 2 of the annual 7.65 percent they pay in payroll taxes into PRAs instead, the trust fund will start paying out more than it receives in 2007, not 2016. Add to that the current state of the stock market, and privatization wouldn’t seem to have much of a chance.

The coalition of conservative ideologues and financial services vendors who have spent 20 years building the privatization movement—the Heritage Foundation, the Cato Institute, and Americans for Tax Reform, along with big donors like State Street Bank, Merrill Lynch, and pension consultant Frank Russell Company—see the under-40 crowd as their ace in the hole. Having entered the workforce at a time of steadily giddier stock market returns and increasingly mainstream anti-government rhetoric, the younger reaches of the Baby Boom plus Gen X aren’t as likely to be spooked by a temporary reversal of fortune. That could make them the voters who finally reject the New Deal’s flagship social program.

Wall Street-backed policy groups like Third Millennium, which purports to represent the interests of twentysomethings, have been clambering for their demographic’s attention for nearly a decade. Third Millennium made its first big splash in 1994 with a poll showing that more young Americans believed in UFOs than believed they would live to receive a Social Security check, which became one of the most repeated survey citations of the 1990s.

In fact, younger Americans have plenty of reasons not to want Social Security turned into a no-guarantees investment fund. If current benefits stay the same for current retirees and workers nearing retirement while payroll taxes are flowing into PRAs, privatization could require trillions of dollars in new taxes a generation from now. Disappearing stock options aside, even dotcommies are more likely than their elders to work in temporary jobs or ones that provide no guaranteed pension. That means they will have a harder time saving on their own for retirement, and may be even more dependent on Social Security’s guaranteed income when they hit retirement age. Many of them are already “in” the program, in fact. Of the 44 million Americans who get a Social Security check each month, 13.5 million are spouses and children receiving disability or survivors’ benefits.

What’s needed, some say, is a sustained effort to reeducate younger Americans about Social Security’s promise. The Campaign for America’s Future, the progressive lobbying group which has put together a save-Social Security coalition with other groups including the National Organization for Women, USAction, the Gray Panthers, the Rainbow Coalition, and an assortment of unions including the SEIU, the American Postal Workers, the National Education Association, and the United Auto Workers. But these groups represent mostly older constituencies. And funding a grassroots campaign is an expensive proposition.

State Street Bank generously funds Cato’s Social Security Privatization Project, which provides much of the theoretical backbone for the privatization proposals Bush’s commission is considering. Outside of the AFL-CIO and a few unions, groups that oppose privatization, like the Campaign for America’s Future, USAction, the 2030 Center, and the Pension Rights Center, don’t have those kinds of godparents.

But lately the political winds seem to be shifting in their side’s favor. Even experts who endorse Bush’s private account scheme admit that he can’t implement it and still keep Social Security fiscally solvent without either raising taxes, which he has ruled out, or cutting benefits, which would shred privatization’s voter appeal. At a meeting of the AARP in February, Conservative firebrand Bill Thomas, new head of the House Ways and Means Committee, warned the powerful seniors’ group that he would welcome an intergenerational clash. “Frankly, you shouldn’t be the winners you are,” he said. Thomas told them his committee would soon hold a series of hearings around the country where retirees and Gen Xers could express their views on the matter.

Two Republican House members, Florida’s E. Clay Shaw Jr. and Missouri’s Kenny Hulshof, held the first hearing on a university campus in Columbia, Missouri, in June. But the 2030 Center, a Washington-based public policy organization that has been rallying support for Social Security among young people, was there too. Working partly through a group of UNITE interns, it alerted students as well as union locals to send people to the event. At the hearing, which drew about 250 people, Shaw and Hulshof issued different colored armbands to younger (red) and older (yellow) attendees so as to alternate questions and comments from each “side.” But according to 2030 director Jeff Mandell, no intergenerational rift emerged. “I think they were stunned by the size of the crowd and the lack of support for their ideas,” Mandell says. Later, reports filtered down from Capitol Hill that a second hearing on another college campus had been called off. “Getting young people to actively play a leadership role—to me that’s enough,” says Hans Riemer, a 28-year-old senior policy analyst at the Campaign for America’s Future.

What’s crucial, others say, is to raise awareness of how Social Security already helps younger people, especially through survivors’ benefits. USAction and its affiliates are collecting testimonials from young beneficiaries, as is 2030. At a press conference before last week’s commission meeting, Tyra Brown, a woman who just finished a master’s at Regent University in Virginia, talked about losing her mother to heart failure at 15 and having to live with her grandmother. “We received Social Security survivors’ benefits to help us with expenses,” she said. “Without those benefits, I’m not sure we could have made it.”

Last month the Bush commission held its second meeting while the Campaign for America’s Future and USAction organized nearly 40 grassroots events around the country that same day to protest its privatization agenda. It was a month after a demo attended by hundreds that the Campaign and the AFL-CIO hastily organized outside the World Trade Center when Treasury Secretary Paul O’Neill came to Wall Street to help launch a new pro-privatization group, the Coalition for American Financial Security.

Boycotts have been an effective tool of the anti-sweatshop movement, and they may become an element in the campaign against Social Security privatization too. In June, AFL-CIO secretary-treasurer Richard Trumka said he would urge union pension funds, which control close to $500 billion in assets, not to do business with financial services companies that help promote Bush’s private-accounts scheme.

The anti-privatization forces will have to replicate and sustain these kinds of initiatives if they want to defeat the movement against Social Security, though. Wall Street and conservative think-tanks have been pressing the issue patiently for decades on many levels: through their pull with Washington lawmakers; through reports, recommendations, polls, and op-eds; and even through Web sites that challenge visitors to “solve” the Social Security crisis with a preselected list of policy changes. While privatization may not succeed this year, the idea is not likely to go away, and the Bush commission’s final report will at least provide the movement with more intellectual capital.

Shaun O’Brien, benefits analyst for the AFL-CIO, believes they can bring young people into the streets because despite the famed UFO poll, younger people’s commitment to Social Security tends to grow as they get older. Time is on the side of the system’s defenders.

In the end, pro-privatization groups “will get more support from young people than from others, but not enough to win the debate,” Riemer predicts. One encouraging piece of evidence: the anti-globalization movement. If activists can build a mushrooming movement around opposition to something as arcane as neoliberalism and the Washington Consensus on global trade, then there may be hope for Social Security.

Related links:

President’s Commission to Strengthen Social Security

Campaign for America’s Future

Cato Institute

Americans for Tax Reform

Heritage Foundation


Third Millennium

Pension Rights Center

2030 Center

Coalition for American Financial Security

National Organization for Women